1

The WTO's subsidy's regime is not about prohibiting subsidies per se (the lone exception, export subsidies, will be discussed immediately, Subsection II). Rather, it is merely imposing the obligation to do no harm to fellow Members through the granting of state aid.Footnote ⁶ Maybe clearer than ever before, the Appellate Body explains that subsidy and caused effect are two different issues, and that the former is – from a substantive perspectiveFootnote ⁷ – of interest to Article 5 SCM only as a cause to the latter (unless it is not a priori verboten, pursuant to Article 3 SCM).Footnote ⁸

2

Several consequences arise from this. Firstly, as the SCM focuses on effect and not on cause, the EU argument that subsidies granted – and, possibly, subsidy programs started – before the entry into force of the SCM were immune from its disciplines was a non-starter.Footnote ⁹

Secondly, this constellation gives occasion to rethink the issue of the ‘life of a subsidy’ and the Appellate Body takes this invitation up with almost palpable gusto. While it flatly rejects the European Union's proposition ‘that there must be “present benefit” during the reference period’,Footnote ¹⁰ the proposition that a subsidy has a ‘life’ is explicitly recognized:

Focusing on the nexus between subsidy and its alleged effect, the Appellate Body explained:

Thus, one may visualize the life-span of the subsidy as such and its effects as parallel curve graphs, which are not identical but rather in a sequencing order and may be partially overlapping.

3

Of course, it is one thing to embrace the concept that a subsidy must have an end, and another one to officially determine the ‘time of death’ – and the effect on the adverse-effect analysis under Article 5 SCM. The European Union had argued that ‘sales of shares between private entities, and sales conducted in the context of partial privatizations’ had eliminated all or part of past subsidies.Footnote ¹⁴ In support of this proposition, it had invoked the Appellate Body Reports in US–Lead and Bismuth II Footnote ¹⁵ and US–Countervailing Measures on Certain EC Products.Footnote ¹⁶

Rightly, the Appellate Body highlights that both Reports only ‘stand for the proposition that a presumption of extinction Footnote ¹⁷ arises where there is a full privatization’ which involves sales at fair market value, at arm's length, and a subsequent full transfer of ownership and control. In Airbus, the Appellate Body had to examine to what extent a partial privatization and private-to-private sales had an equivalent effect on the lifespan of the subsidies in question. However, the three Appellate Body members tasked with DS316 could not agree on one consolidated position and chose to offer insights into their personal thinking:

1. (a) Noting that the Appellate Body has previously ruled in privatization cases that a full privatization, conducted at arm's length and for fair market value involving a complete or substantial transfer of ownership and control, ‘extinguishes’ prior subsidies, one Member is of the view that this rule does not apply to partial privatizations or to private-to-private sales.

2. (b) One Member noted that, as discussed above, the Appellate Body ruled in US–Countervailing Measures on Certain EC Products that … full privatization at arm's length and for fair market value may result in extinguishing the benefit received from the nonrecurring financial contribution bestowed upon a state-owned firmFootnote ¹⁸ … This Member considers the rationale underlying the Appellate Body's case law on full privatization in the context of Part V of the SCM Agreement equally to apply in situations of partial privatization and private-to-private transactions and in the context of Part III of the SCM Agreement. However, this Member also notes that, as the Appellate Body emphasized in US–Countervailing Measures on Certain EC Products, there is ‘no inflexible rule’ that a ‘benefit’ derived from pre-privatization financial contributions expires following privatization at arm's length and for fair market value.Footnote ¹⁹ Rather … ‘[i]t depends on the facts of each case’.Footnote ²⁰ An important question in this context is to what extent the partial privatization or private-to-private transactions resulted in a transfer of control to new owners who paid fair market value for shares in the company.

3. (c) One Member of the Division, though affirming the general test that an extinction of benefit is to be determined upon a consideration of all relevant facts, entertains no small measure of doubt that an acquisition of shares, concluded at arm's length and for fair market value, constitutes relevant circumstances warranting the conclusion that an extinction of benefit has taken place. A subsidy granted to a recipient company contributes to the net asset value of that company. The value of that asset permits the recipient to enjoy an enhanced stream of future earnings over the life of the asset. The asset is the property of the recipient. The recipient's shareholders enjoy the right to the dividends that may be declared by the recipient and to any capital gains that arise from the enhanced earnings attributable to the recipient. When shares change hands on an arm's-length basis and for fair market value, the buyer pays a price that, in the estimation of the buyer, places a proper value on the future earnings of the recipient. Those earnings derive from all the assets of the recipient, including the benefit of any subsidy paid to the recipient. One shareholder may not accurately value or properly manage the assets of the recipient. Precisely for this reason, sales of shares take place: the buyer believes that the assets, properly managed, will be worth more over time than the price paid, and the seller believes the opposite. Time will tell who is correct. The central point is that a sale of shares, whether or not it conveys control, transfers rights in the shares to a new owner. The assets of the company, to which the shares attach, do not change at all. Nor could it be otherwise, because the buyer would then not acquire the full benefit of the bargain: the buyer would pay for an asset (the subsidy) that had in the very sales transaction been ‘extinguished’. Shares in listed companies are traded on stock exchanges with great frequency and without any fear that sales on the market diminish the underlying value of the assets owned by these companies. The changing price of listed securities reflects the different valuations that buyers and sellers place upon companies and their underlying assets. However, nothing about these trades extracts the value of any asset, including the benefit of any subsidy granted. That subsidy continues to benefit the recipient, even if the ownership of the recipient's shares changes from one day to another. Given that the Appellate Body in this case does not need to come to any final view on the issue of extinction in the context of a partial privatization or private-to-private sales, these matters do not require more definitive determination.

The Appellate Body had the luxury to not decide the issue as it was of the opinion that the Panel's analysis had drastically fallen short of what was required in the matter: arguments of the European Union with regard to the quality of the transactions in question had, in the Appellate Body's view, not received due attention, both with regard to factual findings and the care with which the arguments of the European Union had been dealt with. This reluctance of the Appellate Body is to be regretted; more clarity on this point would have been most welcome.

4

In addition, the Appellate Body rejected the European Union's proposition that the removal of cash from two Airbus partners constituted an ‘extraction’ of subsidies. Recognizing this possibility in principle, it decided that the transactions brought forward by the European Union were not ‘of such a nature, kind, and amount as to be relevant to its adverse effects analysis’. In particular, it doubted the existence of a specific relationship between subsidy and cash removal:

A second criterion, namely ‘whether it had been demonstrated that the extracted cash permanently left or moved beyond the reach of the “company-shareholder unit”’ could be left to be analyzed on another day.

5

How to calculate the benefit provided by Launch finance from the four EU Member states concerned? When answering this question, the Appellate Body had the benefit of having had been exposed to numerous arguments from the parties to the dispute on how to define the relevant benchmark for the ex-ante-rate-of-return that would have been the threshold for market investors to undertake investment. For all practical purposes, the question focuses on the risk premium a rational private investor would demand in order to engage financially with regard to the different LCA product launches. Emphasizing that point, the Appellate Body's ReportFootnote ²² stresses that the assessment has to take place on an ex ante perspective, i.e. as if it was taken when the profit-maximizing lender and cost-averse borrower commit to the transaction. How the loan actually performed over time is irrelevant: the benefit of hindsight is denied even to the most astute private investors.

6

The central issue analyzed by the Appellate Body in regard to assessing whether the challenged financing measures confer benefit concerns can be separated into two questions: firstly, whether a single fixed project specific-risk premium for all LCA product launches (derived from a 2004 study of venture capital investments) represents an appropriate quantification or whether a more accurate estimate is that obtained from anticipated returns of a sample of risk-sharing suppliers to A 380. In its assessment, the Appellate Body identifiesFootnote ²³ technical problems and inconsistencies in both alternatives. Nevertheless, as both attempts to quantify the appropriate risk premium come to the conclusion that the challenged Launch Aid/Member States’ Financing measures do not fully reflect market conditions at the time, the Appellate Body accepts that the LA/MSF measures confer a benefit within the meaning of Article 1.1(b) SCM Agreement. A significant missing element is, however, the lack of a quantitative estimate of the subsidy element represented by LA/MSF measures, thus impeding a realistic and robust analysis of the actual displacement orders data when considering that Boeing was receiving subsidies over much of the same period.

1

To the extent they entail the damaging effects on fellow WTO members, enumerated in Article 5 SCM Agreement, subsidies stop being a purely internal method of states influencing the behavior of their economic operators and turn into a matter of interest for WTO law. If a state can show that another state's subsidy has the negative impact described in Article 5 SCM Agreement, it can react, either by attacking the subsidy in the multilateral DSU procedure, or unilaterally by offsetting the harming consequences through countervailing duties.

However, there is a mortal sin that is so wrong (according to the contracting parties to the SCM Agreement) that no concrete adverse-effect damage needs to be shown: a subsidy is, pursuant to Articles 3 and 4 SCM, per se prohibited (and thus: attackable and countervailable in a particularly swift and sharp manner) if it is (de iure or de facto) conditional upon either export performance or upon the use of domestic over-imported goods.Footnote ²⁴ Article 3 SCM reads in its relevant parts:

[T]he following subsidies … shall be prohibited:

Original Footnote 4 reads:

2

The measures attacked by the US complaint were not contingent in law: none of the legal documents forming the legal basis for the support measures established that the benefit granted was conditional upon Airbus exports.

3

Of course, Airbus operates in a global market (see infra, Subsection III.2). If it was to be a commercial success, it had to acquire market share in the global and (provided they really exist) in regional markets. And while many details about the future champions of the global commercial airline industry were not foreseeable at the time when decisions were made, it was crystal clear that without export markets the project would, quite literally, not fly: how could, for example, the A 380 not be an economic debacle, unless it acquired significant market share in the Gulf and in the Asia-Pacific region? Despite the US suspicion that EU states subsidize no matter what, European taxpayers expected, given the amounts at stake, at least a significant part of their money back. And that was only to happen if non-EU orders would fill Airbus books.

Relying on detail-rich and not necessarily always completely clear prior Appellate Body case law, the United States could hence make a plausible claim that what the Europeans had done amounted to an a priori illegal export subsidy, and should be subjected to the most far-reaching sanctionsFootnote ²⁵ in WTO law: wasn't the grant of subsidies based on the expectation that Airbus would be an export success? The link between subsidy and export expectation fulfilled, in the complainant's view, the essence of what an export subsidy is: pay-outs tied to export performance. The Panel bought into that narrative: without reasonable expectation of export performance, no business case for Airbus; without a business case, no subsidies; de facto thus, the Panel opined, the subsidies were tied to export performance, contingent in fact upon exports. In doing so, it relied heavily on the fact that sometimes the documentations of the financing included specific references to exports while this was not the case in others. In the latter case, the Panel accepted that these were actionable subsidies whereas in the former the rough justice Footnote ²⁶ of the SCM's Part II applied.

4

Prior case law with regard to de facto contingency may be summarized as follows: the Appellate Body Report on Brazil–Aircraft (Article 21.5–Canada) Footnote ²⁷ clarified that a subsidy coming under the purview of the Illustrative List Footnote ²⁸ was ipso facto prohibited; a complainant need not show in detail that the general requirements of Article 3.1 SCM are met. To the contrary, if a support measure does not appear on the Illustrative List, the complainant will have to demonstrate that the subsidizing state ‘either in law or in fact’ made payment conditional on either exports or the use of domestic goods.

In Canada – Measures Affecting the Export of Civilian Aircraft (‘Canada–Aircraft’),Footnote ²⁹ the Appellate Body, paying particular attention to the SCM's footnote 4, decided that mere knowledge of the beneficiary's exporting activities would not suffice for the de facto threshold to be met. Something more is required, the Appellate Body explained:

5

The Airbus Report develops that body of law:Footnote ³² far from breaking with prior precedents, it clearly adds new elements to the definition of an export subsidy under Article 3 SCM. Whereas the Panel had ‘equated the standard of export contingency with the reasons(s) for granting a subsidy’Footnote ³³ – and probably could do so reasonably expecting to be in line with prior Appellate Body jurisprudence – the Appellate Body, this time in no uncertain terms, rejects a ‘standard that requires anticipated exportation to be the reason for the granting of the subsidy’.Footnote ³⁴ It explicitly states that ‘the standard for de facto export contingency is [neither] met … by showing that anticipated exportation is the reason for granting the subsidy … [nor by showing] the subjective motivation of the granting government to promote the future export performance of the recipient’.Footnote ³⁵

Rather, building on its prior jurisprudence, the Appellate Body developes the notion that a subsidy must be ‘geared to the promotion of exports’:

The new operative word for describing the special nexus between export performance and the granting of a subsidy is the term geared. The Report uses it 20 times, indicating that its drafters wanted to let the world know that a new concept has been added to pre-existing case law. What does it mean, then? The Appellate Body answers this question in para. 1045 of its Report:

In line with other tests established by the Appellate Body that are supposed to avoid the appearance to examine, horibile dictu, intent,Footnote ³⁸ the Appellate Body establishes pro forma objective criteria that are, nevertheless, not free from highly subjective connotations:

To what extent does that test establish a standard that deviates from de jure export subsidies? After all, it may be imaginable that an explicit linkage between export performance and the granting of a subsidy would not qualify as an ‘incentive to the recipient to export in a way that is not simply reflective of the conditions of supply and demand in the domestic and export markets undistorted by the granting of the subsidy’. An explicit reference in (domestic) law or in an executive act would then suffice to render a previously as such perfectly legal subsidy – subject only to the limitation to not create the consequences described in Article 5 SCM – into one of the rare instances where the WTO Agreement explicitly states that a state measure is prohibited, and thus utterly illegal, subject to the harshest procedural treatment dispended by the WTO Agreement.Footnote ⁴¹ So could there be a difference between the standard applicable to de jure export subsidies and those applicable to de facto export subsidies?

Upon closer inspection – and absent laboratory conditions that the Appellate Body does not view as the appropriate test environmentFootnote ⁴² – it seems difficult to imagine an explicit conditionality between the granting of public funds and export performance that would not constitute an incentive to export more, both in absolute and relative terms, than would have been the case under exposure to normal market influences. That would meet the standard established in Airbus – it should be recalled: an evidentiary standard! – for de facto export subsidies. Because the difference between the WTO regimes for a priori illegal export subsidies and for normal state aid are so stark (in both theory and procedural practice), some nexus between subsidy and export performance does not suffice to declare measures of a sovereign Member a priori illegal. In the case of the de iure export subsidy, the support measure is explicitly and manifestly contingent on export performance.Footnote ⁴³ Of course, the interpretation of the wording of a text allegedly establishing de iure contingency may prove difficult, and in that case the interpreter will take guidance from the Airbus Report.

To sum up this point: in line with the general rules, it behooves the complainant to show (and to the adjudicatory bodies of the WTO to establish) that the state measure in question skews market conditions in order to view support measures as per se illegal export subsidies; if it cannot be shown that a subsidy is geared to induce more exports, contrary to market conditions, then it qualifies as a regular subsidy, actionable pursuant to part III of the SCM Agreement, but not one that merits summary justice and a priori condemnation.

It is in that light that the test whether a subsidy has been geared to induce the promotion of future export performance by the recipient has to be administered. Firstly, hindsight must not come into play: the test ‘must be assessed on the basis of the information available to the granting authority at the time the subsidy is granted’.Footnote ⁴⁴ The Appellate Body defines high thresholds:

6

The Appellate Body's Report in EC and Certain Member States–Large Civil Aircraft is certainly a welcome concretization of previously developed concepts. Building on previous jurisprudence, it explains for the first time in such a clear fashion that the decisive criterion for de facto export subsidies is the favoring of exports contrary to market conditions ‘over products destined for domestic consumption’.Footnote ⁴⁶ Only such a restrictive interpretation avoids the absurdity that, say, most Singaporean subsidies would a priori fall into the category of prohibited subsidies, as subsidies in a small country with an export-oriented economy will more often than not be granted in expectation of export performance and in order to increase such performance.

It would seem that the Appellate Body, in order to avoid pronouncing itself too firmly on questions that were either not asked or can, in the Appellate Body's opinion, await an answer on another day, refrained from establishing truly operational standards. In fact, it seems that the Appellate Body is even keen to get academic feedback, in particular from economists, to incrementally develop this jurisprudence.

Therefore, the Appellate Body limits itself to establishing some outer parameters of a new export subsidy definition, and illustrates it with an example that shows both the practicability (in the case at hand) but also the remaining, possibly intended, imprecision.

Export subsidies are per se illegal, because they represent, in the mercantilist worldview underlying the GATT 1947 and to a large extent the WTO Agreements, an attack (our French colleagues still write on and teach la guerre commerciale) of a sovereign state on the (commercial) homeland of another state. Such a scenario, no doubt, would be caught by the standard offered by the Appellate Body.

The new test, however, deals with more complex and realistic constellations: imagine a scenario where the home market is saturated (yet) inexistent, or a scenario where the market is really a world market. If, in that case, a producer wants to expand, the expansion will unavoidably take place not in the domestic market. While the numerical example suggested by the Appellate Body would, at first glance, be cold comfort for such enterprises and the states subsidizing them, the test still reduces drastically the coverage of prohibited subsidies pursuant to Article 3 SCM: this is so because the determinative criterion is, according to the Appellate Body, whether the subsidy would change the export–import ratio that would normally have developed as a consequence of unfettered supply and demand.

It would seem that in many instances of state support, measures would be far too complex to be adequately addressed by the complete prohibition of Article 3 SCM. In the Airbus constellation that was arguably the case: Airbus was also an effort to be less dependent on a foreign quasi-monopoly, closely related with the military-industrial complex of that foreign state;Footnote ⁴⁷ an effort to create incentives for further technological leadership, preserve and create professional jobs, and the like. In those constellations, the regular subsidies regime seems to offer a more appropriate instrument than part II of the SCM. Arguably these constellations often reflect market situations that cannot be assimilated to the Ceteris Paribus clause (referred to in paragraph 1047) ‘all other things being equal’. The performance of a profit-maximizing entrant into a global market dominated by an incumbent with significant market power is likely to be the result of strategic interactions particularly in regard to product launches, resulting in important and persistent differentials in the margins on sales to customers depending on the degree to which the product ranges of the entrant and incumbent are substitutable. Such market situations can be expected to pose problems for the test proposed since they demand rigorous definitions of the geographic and product markets at issue so as to interpret reliably the trends in domestic and export sales.

Many of the challenges humankind faces in the next century – access to freshwater, transition to a post-carbon energy environment, global warming, food security, nano-technology, fight against multi-resistant pathogenic agents, exploration of outer space and deep-water zones, development and containment of artificial intelligence, to give just a few examples – may benefit from launching aids that will inevitably benefit projects that target the world (i.e., the global market); in this context the distinction between domestic versus foreign consumption seems irrelevant. The potential competitive dangers of such state engagements are obvious, and the SCM offers in its part III et seq. appropriate and timely antidotes. The ‘nuclear option’ of part II, however, would not seem the appropriate avenue to control abuses of such subsidies.

1

This is what the Appellate Body had to say in this regard:

This clarification is to be applauded. It is, of course, the duty of the Panel to define whether in reality pain was inflicted on other Members by subsidies. That requires competitive relationships, real ones, and not just the claim of a party to the dispute. The duty of the Panel to examine what the complaining party presents as the factual basis for its claims seems a self-evident proposition. The Panel is supposed to make an ‘objective assessment’Footnote ⁴⁸ of both facts and law; that seems hardly possible with a boilerplate internalization the position of one of the parties to the dispute. On the basis of the available empirical literature on the LCA industry, the benefits of a more refined definition of the product market would not have been theoretical, but, on the contrary, quite operational for the displacement analysis. Empirical studies of LCA industryFootnote ⁴⁹ suggest that LCA models within the industry show quite different degrees of substitution between product ranges: LCA products in the same cluster (defined for example in terms of passenger capacity and range) compete closely with one another but the degree of substitution between the LCA models in different clusters vary widely. The importance of defining correctly the relevant product market is to enable a robust evaluation of displacement of a product by a product that exercises on it a competitive constraint. As noted by the Appellate BodyFootnote ⁵⁰ ‘[a]n assessment of the competitive relationship between products in the market is required in order to determine whether and to what extent one product may displace another. Thus, while a complaining Member may identify a subsidized product and like product by reference to footnote 46, the products thereby identified must be analyzed under the discipline of the product market so as to be able to determine whether displacement is occurring.’ A similar reasoning extends to the notion of the geographic scope of the relevant product market. Where the market is cross-border or even global, the distinction between sales to the domestic ‘market’ and sales to the export ‘market’ disappear, and so do the terms domestic or export market shares. It follows that any conclusions on discernible displacement of a like product by a subsidized product have to be made on the basis of an objective determination of the relevant product market.

2

Of course, what irritates at first glance is the geographic compartmentalization of markets (e.g., Taiwan, Australia, India) whereas one would have believed that LCAs are exposed to competition in a global market. The key to the Appellate Body's approach is the wording of Article 6.3 SCM.Footnote ⁵¹ Its subparagraphs (a) and (b) both concern effects of state aid in a geographically well-defined market: on the one hand ‘the market of the subsidizing Member’ and, on the other hand, ‘a third country market’.

The Appellate Body, as any applier of the law, has to recognize the normative starting point, even though it may not represent a categorization current economic thinking would subscribe to.

The Appellate Body however mentions, almost in passing in footnote 2462, that ‘in terms of the geographic dimension of markets under Article 6.3(c) of the SCM Agreement, it may be appropriate to examine the “world market” and the conditions of competition as they exist in that market’. This, however, is the only occasion to do so, as the first two subparagraphs determine a territorial approach.

1

An interesting economic and quantitative analysis of displacement of orders of Boeing that could be attributed to subsidies to Airbus is attempted by the Appellate Body Report in section IX.C.Footnote ⁵² The analysis is predicated on defining the relevant product market as consisting of three submarkets – Single-aisle LCA, Twin-aisle LCA, and Very Large LCA. This provisional definition of LCA was selected as it was not contested by either party. The method of analysis adopted by the Appellate Body was to examine the trends in the volume of sales and relative shares of the orders of each of the manufacturers to specific countries, over a six-year reference period. The analysis is therefore very much along the lines outlined in paragraph 1048 of the Report. The analysis of the orders data over 2001–2006 leads the Appellate Body to confirm displacement of Boeing sales to half of the specific countries put forward by the complainant:Footnote ⁵³ in terms of unit sales over the period to these countries this amounted to 70% of total orders. This can be regarded as significant, if attention is limited to just these countries, but much less significant in relation to global LCA orders over the reference period.

2

In regard to lost sales, the Appellate Body Report is careful to define the term and the approach needed to identify lost sales ‘caused’ by the challenged measures. As noted by the Appellate Body Report, this case was the first instance when the issue had been examined by it, under Article 6.3(c) of the SCM Agreement. The Report underlines that the analysis compare the sales actually made by the competing firm(s) of the complaining Member with the sales resulting from a counterfactual scenario in which the firm(s) of respondent Member would not have received the challenged subsidies.Footnote ⁵⁴ The central element in the counterfactual underlying the Appellate Body's Report is that displaced and lost sales for Boeing to certain geographic destinations occurred because the challenged subsidies made it possible for Airbus to launch rival offerings at the time it did. But for the subsidies, there would not have been the availability of competitive alternatives and wider choice of LCA specifications, and hence no loss or displacement of Boeing sales over the reference period would have taken place.

3

In order to fine-tune displaced and lost sales of Boeing during 2001–2006, alternative counterfactual scenarios including the ‘no-subsidy’ case for Airbus are considered in the Report. For a consistent approach, it would have been necessary to develop a global demand growth evolution corresponding to delayed development of product families by Airbus. Such a counterfactual would have highlighted greatly reduced pressure on Boeing to undertake expensive development expenditure of its own product range. The Airbus Report does not consider that there would be a different evolution of global LCA demand-growth under the scenario of a reduced Airbus operation. The common assumptions under the counterfactual scenarios considered are that the development of LCAs by Boeing over the whole period and the global demand for all types of LCAs would be as it actually was during the whole period. An incumbent, dominant or not, has no profit incentives and faces no price pressures from captive customers to escalate developmental spending so as to meet or create prospective demand. On the assumption that Boeing's product development over the period did not benefit from subsidies, the basic analytical framework is certainly correct, but simulations reported equate the time pattern of global LCA growth development and product launches by the incumbent in the ‘no subsidy’ case to the realized development over the reference period of global LCA demand growth and product launches. The core dynamics of LCA industry in the form of strategic interactions between competitors regarding developmental expenditures leading to product launches that simultaneously drive demand growth, as well as react to that demand growth, are not adequately incorporated in the counterfactual simulations.

4

The conclusionsFootnote ⁵⁵ drawn in the Appellate Body Report on displacement of sales and lost sales favor, based on the evidential record before the Panel, the counterfactual scenarios that assume that without subsidies there would not have been the same development pace of LCA products of Airbus.